5A - Total Flashcards by Adam Herron

Wexford Co. has a subunit that reported the following data for Year 1:

Asset (investment) turnover: 1.5 times
Sales: $750,000
Return on sales: 8%

The imputed interest rate is 12%. What is the division residual income for Year 1?

Wexford has a return of 8% on sales revenue of $750,000, so net income is $60,000.

Asset turnover is a measure of how effectively a business unit uses its assets. It equals sales revenue divided by average total assets. If the turnover is 1.5 times, the revenue of $750,000 can be divided by the turnover of 1.5 to find that total assets equal
$500,000.

Residual income is operating income less the imputed interest on the assets used to generate the income. The imputed income at 12% multiplied by assets of $500,000 is $60,000. Subtracting imputed income of $60,000 from net income of $60,000 leaves residual income of zero.

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ROI = ??
Profit Margin = ??
Asset Turnover = ??
Capital Turnover = ??
Price-Earning Ratio?

ROI: Net income / Invested Capital
PM: Net Income / Sales
AT: Sales Rev / Total Avg Asset
Cap Turnover: sales / Invested Capital
PE: Mkt price of stock / EPS

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___is the amount of net income in excess of a minimum desired rate of return on invested capital.
ex:
Net income $150
Return on investment at minimum rate of return
($1,000 at 0.12) 120
Residual income $ 30
====

___measures surplus or excess value created by an enterprise’s investments.

_____ measures provide a more comprehensive picture of performance that considers a wider range of possibilities.

___decision making: At the division level, when one performance measure (such as return on investment) is not relied upon solely or given a high emphasis, managers are free to make decisions that are more in tune with the long-term profitability growth objectives of the company as a whole.

Residual income

Economic value added (EVA)

Multiple performance

Congruent

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The following selected data pertain to the Darwin Division of Beagle Co. for the current year:

  Sales                  $400,000
  Operating income        $40,000
  Capital turnover              4
  Imputed interest rate        10%
What was Darwin's current-year residual income?

$30k

Capital turnover = Sales / Invested capital
4 = $400,000 / Invested capital
4 x Invested capital = $400,000
Invested capital = $400,000 / 4 = $100,000

Operating income $40,000
Less imputed interest on
invested capital (10% x $100,000) 10,000
——-
Equals residual income $30,000

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The resource base figures prominently in performance measures such as return on investment, residual income, and economic value added. The theoretically superior (not necessarily the one most widely used) investment base would be: HISTORICAL COST

False - Replacement Value

Replacement cost is a measure of current value. Since revenue and most expenses are also stated in terms of current value, a more consistent performance measure (i.e., return on investment or residual income) will result when all variables are stated in current dollars.

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Vince, Inc., has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device?

___ & __ of the new device
Customer’s relative preference for __compared to __

Quality & Life

Pref for Quality compared to Price

All of the factors listed—quality, life, and customers’ preferences—should be considered by Vince, Inc., in setting the price of the new laser disc device.

Since the device is new, competition (either price or other products) is not as likely to be a factor as would be the case later on.

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Minon, Inc., purchased a long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income?

Increase in both return on investment and residual income

Decrease in both return on investment and residual income

Increase in return on investment and decrease in residual income

Decrease in return on investment and increase in residual income

Decrease in both

Return on investment (ROI) is calculated by dividing the invested capital into the net income. If the invested capital increases due to a long-term asset purchase, then the ROI will decrease.

Residual income is the amount of net income in excess of a minimum desired rate of return on invested capital. This can be expressed in the equation: Reported net income - (Desired rate of return × Invested capital). If invested capital increases, the residual income will decrease.

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Residual income is a performance evaluation that is used in conjunction with return on investment (ROI) or instead of ROI. In many cases, residual income is preferred over ROI because:

residual income is a measure over time while ROI represents the results for a single time period.

residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI

the imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI

average investment is employed with residual income while year-end investment is employed with ROI

residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI

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What is strategic planning?

It consists of decisions to use parts of the organization’s resources in specified ways.

It establishes the general direction of the organization.

It establishes the budget for the organization.

It establishes the resources that the plan will require.

It establishes the general direction of the organization.

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The ___of an organization is its central purpose, the reason for its existence. It answers the questions “What business are we in?” and “What business do we want to be in?”

Strategic goals are the major goals that relate to the company’s mission T/F

mission

True

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In for-profit companies, a major part of strategic planning would be profit-related. T/F

___and plans translate overall strategy into shorter-range specifics for each division or department.

\_\_\_and plans are detailed implementation of the company's strategy. They are annual plans with specific objectives for individual operating units

____plans are sometimes called disaster recovery plans, to be implemented in case of fire, flood, power outages, etc.

True

Tactical objectives

Operational objectives

Contingency

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An effective ___system is necessary for an organization to realize its strategic, tactical, and operational goals.

Three components that make it effective

___activities and processes (measurement of progress)
Identifies ___& implement corrective action
Flexibility to be updated (Adapts to change) T/F

control

Monitors
deviations
True

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Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?

Actual cost
Standard variable cost
Actual cost plus mark-up
Negotiated price

Variable Cost

Variable costs include direct costs that can generally be controlled by the division to which they are allocated.

“Actual cost” and “Actual cost plus mark-up” are incorrect because actual costs can be controlled by the cost center.

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Three methods for establishing a transfer price

Market-based price
Cost-based price
negotiated price

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___ price: The transferring entity prices the goods or services to the buying entity at a price equal to that prevailing for those goods or services on the open market.

___The transferring entity prices the goods or services to the buying entity at its cost of providing the good or service

\_\_\_price: The transferring entity prices the goods or services to the buying entity at a price that is mutually acceptable to both the selling and buying divisions.

Market-based

Cost-based prices:

Negotiated

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Objectives in transfer price

Evaluate \_\_\_
\_\_\_ taxes
\_\_\_ tariffs
\_\_ exchange rates
Move Cash t/f
Improve \_\_\_ position

Performance
Minimize
Minimize
Hedge
True
Competitive

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Which of the following terms represents the residual income that remains after the cost of all capital, including equity capital, has been deducted?

Free cash flow
Market value-added
Economic value-added
Net operating capital

EVA

Economic value added (EVA) is after-tax operating income less the weighted average cost of capital.

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A company’s target gross margin is 40% of the selling price of a product that costs $89 per unit. The product’s selling price should be:

$124.60
$142.40
$148.33
$222.50

148.33

Revenue 100%
COGS (cost of goods sold) 60%
Gross profit 40%

(Sales − 0.40) × Sales = $89
0.60 × Sales = $89

Sales = $89 ÷ 0.60 = $148.33

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A variety of nonfinancial measures—from the accounting system or from other data sources—can be used to evaluate performance. Examples of nonfinancial measures include:

a. inventory turnover,
b. labor efficiency,
c. on-time deliveries,
d. schedule attainment,
e. units per hour,
f. throughput time,
g. measures of customer satisfaction (e.g., from such indicators as surveys, repairs, complaints, or number of service calls), and
h. measures of environmental compliance.

YEAH

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Nonfinancial measures can be used to evaluate performance. Which of the following is a nonfinancial measure?

Free cash flow

Capital asset ratio

Labor efficiency

Quick ratio

Labor Efficiency

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Under the balanced scorecard concept developed by Kaplan and Norton, employee satisfaction and retention are measures used under which of the following perspectives?

Customer

Internal business

Learning and growth

Financial

learning and growth

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The balanced scorecard views an organization from four perspectives; metrics are developed and data is collected and analyzed for each of the following four perspectives:

___This perspective forms the foundation of all knowledge-worker organizations and includes employee training and corporate cultural attitudes related to individual and corporate self-improvement.

____Metrics based on this perspective provide managers with feedback regarding how well their business is operating, and whether its products and services meet customer requirements (the mission). Examines a company’s success in targeted market segment

____If customers are not satisfied, they will eventually find another supplier(s) that will meet their needs

___Even under a scorecard system, there remains a need for traditional financial data, provided that any undue emphasis on financial-related data does not “unbalance” the other perspectives.

Learning and growth:

Business (internal) processes:

Customer (satisfaction) perspective:

Financial:

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Residual income of an investment center is the center’s:

income plus the imputed interest on its invested capital.

income less the imputed interest on its invested capital.

contribution margin plus the imputed interest on its invested capital.

contribution margin less the imputed interest on its invested capital.

income less the imputed interest on its invested capital.

Residual income is the amount of net income in excess of the imputed interest on its invested capital, so “income less the imputed interest on its invested capital” is correct.

The imputed interest on investment is a rate determined by corporate headquarters to encourage the investment center managers to invest in projects that would return more than that rate since residual income will be increased.

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Integrating TQC (total quality control), TQM (total quality management), and JIT (just-in-time) controls achieves many benefits. Which of the following is not a benefit of using these techniques?

Fewer defective units are produced before the problem is identified.
The process causing the problem can be fixed before additional bad units are produced.
Higher-quality products improve customer satisfaction.
Focus on finding the problem and fixing the problem after it occurs

Focus on finding the problem and fixing the problem after it occurs

QC, TQM, and JIT are preventive measures and are used to identify critical process points to reduce problems or defectives units at the earliest point of identification, resulting in fewer defective units produced before the problem is identified (no need to wait for defective units to reach a critical threshold) and the process causing the problem being fixed before more bad units are produced.

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TQC and JIT are often combined so that the production process is stopped whenever something goes wrong. T/F ____involves all employees in the quality control effort. It is the unending quest for perfect quality—the striving for a defect-free manufacturing process. ____is a manufacturing philosophy that promotes the simplest, most efficient means of production. Under ideal conditions, the company would receive raw materials just in time to go into production, manufacture parts just in time to be assembled into products, ___is the application of quality principles to all of the organization's endeavors to satisfy customers. It is a method of managing the organization to excel on all dimensions.

True Total quality control (TQC) Just-in-time (JIT) Total quality management (TQM)

Benchmarking is a measurement of quality. Which of the following is not a characteristic of benchmarking? Comparing organizational products, programs, and strategies with peers Measuring the organization against “best in class" Measuring only internal quality for products, programs, and strategies Analyzing how other organizations achieve their high-performance levels

Measuring only internal quality for products, programs, and strategies Benchmarking is a measurement of quality which entails comparing an entity’s policies, products, programs, strategies, etc. with standards or peers, usually those considered best-in-class. These performers may be INTERNAL OR EXTERNAL (not just internal), and they are not limited to the benchmarking entity’s industry or area.

___is a measurement of quality which entails comparing an entity's policies, products, programs, strategies, etc. with standards or peers, usually those considered best-in-class.

Benchmarking

Costs that can be definitely influenced by a given manager within a given time span are best defined as: controllable costs. period costs. fixed costs. variable costs

Controllable Cost Period costs are those deducted as expenses during the current period without having been previously classified as costs of inventory.

____costs are those deducted as expenses during the current period without having been previously classified as costs of inventory. Costs that can be definitely influenced by a given manager within a given time span are best defined as ___

Period Costs Controllable Costs

A manufacturer that wants to improve its staging process compares its procedures against the check-in process for a major airline. Which of the following tools is the manufacturer using? Total quality management Statistical process control Economic value-added Benchmarking

Benchmarking Benchmarking entails comparison of process performance with other process performers, usually best-in-class performers. The other company can be in the same industry or other industries. Statistical process control is a method of process control that uses statistical methods.

A company's common stock has a market value of $45. The company's most recent annual earnings per share is $3.60 and the company pays an annual dividend of $1.50 per share. What is the company's price-earnings ratio?

12.5

Freer Co. purchased a piece of machinery for $50,000. Freer will use the machinery in the production of its product line for five years, at which time the machinery will have a residual value of $5,000. Freer anticipates that it will produce 90,000 units the first year with total units of 450,000. Which of the following methods will allow Freer to claim the greatest amount of depreciation in the first year? Straight line Sum-of-the-years'-digits Double-declining balance Units of production

Double-Decline Sum-of-the-years'-digits (SYD) = 5/15 × ($50,000 − $5,000) = $15,000 Double-declining balance = (1/5 × 200%) × ($50,000) = $20,000 Units of production = (90,000 units ÷ 450,000 units) × ($50,000 − $5,000) = $9,000

hich of the following balanced scorecard perspectives examines a company's success in targeted market segments? Financial Customer Internal business process Learning and growth

Customer

To evaluate its performance, the Blankie Co. is comparing its costs of quality from one year to the next. The relevant costs are as follows: First Year Second Year Prevention $45,000 $60,000 Appraisal 25,000 35,000 Internal failure 80,000 50,000 External failure 75,000 65,000 Which of the following conclusions can Blankie draw about its quality program? It has been a failure, because conformance costs decreased by $40,000 while nonconformance costs increased by $25,000. It has been a success, because conformance costs decreased by $40,000 and nonconformance costs increased by $25,000. It has been a failure, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000. It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.

It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000. In total quality control costs, the cost of conformance is the sum of prevention costs plus appraisal costs, $70,000 the first year and $95,000 the second year, an increase of $25,000. The costs of nonconformance (failure costs) include internal failure and external failure, $155,000 the first year and $115,000 the second year, a decrease of $40,000. The quality program is a success because the net decrease in quality control costs was $15,000.

In total quality control costs, the cost of conformance is the sum of prevention costs plus appraisal costs, T/F The costs of nonconformance (failure costs) include internal failure and external failure, T/F

T T

Ratio for Manufacturing Cycle Efficiency

Manufacturing or Process Time ______________________- Time from start of manufacturing to delivery

Wolk Corporation is a highly automated manufacturing firm. The vice president of finance has decided that traditional standards are inappropriate for performance measures in an automated environment. Labor is insignificant in terms of the total cost of production and tends to be fixed, material quality is considered more important than minimizing material cost, and customer satisfaction is the number one priority. As a result, delivery performance measures have been chosen to evaluate performance. The following information is considered typical of the time involved to complete orders. Wait time: From order being placed to start of production 10.0 days From start of production to completion 5.0 days Inspection time 1.5 days Process time 3.0 days Move time 2.5 days What is the manufacturing cycle efficiency for this order?

25% Manufacturing or Process Time ______________________- Time from start of manufacturing to delivery = 3 days / (5 days + 1.5 days + 3 days + 2.5 days) = 3 days / 12 days = 25.0% We ignore From order being placed to start of production 10.0 days b/c we dont have it

Rework costs should be regarded as a cost of quality in a manufacturing company’s quality control program when they are: caused by the customer. caused by internal failure.

II only

The costs of a company’s quality control system are divided into four parts: ____costs are incurred to keep quality defects from occurring (e.g., training). ____costs are incurred in the measurement and analysis of data to insure the product conforms to specifications (e.g., inspection). ____costs are incurred as a result of poor quality found through appraisal prior to delivery to the customer (e.g., reworking). ____costs are incurred to correct defects after the product has been delivered to the customer (e.g., warranties).

Prevention Appraisai Internal Failure Cost External Failure Cost

Performance measures for investments and business segments sometimes use imputed costs to calculate performance results. Imputed costs reflect what something should or would cost, but they are not recorded in accounts because they are not actual expenditures of cash or other resources. Return on investment (ROI) and residual income (RI) are two commonly used performance measures. Imputed costs are used in: ROI but not RI. RI but not ROI. both ROI and RI. neither ROI nor RI.

RI but NOT ROI Return on investment (ROI) is equal to income (actual revenue minus actual expense) divided by investment cost of asset(s) used. It does not utilize any imputed costs. Residual income (RI) is the result of subtracting the imputed cost of investment from operating income. Thus, it utilizes some imputed costs

What is process management? The process of planning and monitoring the operations of a business process The process of assigning a project manager The technique of processing information The technique of reengineering a business process

The process of planning and monitoring the operations of a business process

____is the planning and monitoring of the operations of an actual business process. Knowledge of the process, process skills, techniques, tools, and systems must be applied to improve the business processes already in place.

Process management

Managing a business from a process perspective requires focusing on three crucial factors: vision, mission, and core values. A ___is a long-term aspiration: a source of motivation to build a business structure, determine strategic plans, and guide its long-term decision making. It is a set of ideas A ___is a fundamental purpose of a company that remains unchanged over time. _____are principles that help companies determine whether their actions and decisions are right or wrong.

Vision Mission Core Value

Augusta, Inc., expects manufacturing and sales of 70,000 units of product Maggie, its only product, to occur evenly over a 10-week period. Augusta pays for materials in the week following use. The balance of accounts payable for materials at the beginning of the 10-week period is $40,000. There are no beginning inventories. The following information pertains to product Maggie for the 10-week period: Sales price $11 per unit Materials $3 per unit Manufacturing conversion costs—Fixed $210,000 Variable $2 per unit Selling and administrative costs—Fixed $45,000 Variable $1 per unit What amount should Augusta budget for cash payments to material suppliers during the period?

Manufacturing and sales occur evenly over the period, so each week has the same production and sales. At 70,000 units, that is 7,000 units per week. Cash payments for materials are $3 per unit, so payments for material for one week’s production is $21,000. They will pay $40,000 at the beginning of the period for beginning accounts payable in addition to paying for 70,000 units at $3 per unit, or $210,000, for a total of $250,000. However, the materials used during the last week, 7,000 units at $3, or $21,000, will not be paid until the first week after the end of the period, reducing cash payments during the period down to $229,000.

Universal Air, Inc., supplies instrumentation components to airplane manufacturers. Although there are only a few competitors in this market, the competition is fierce. In order to remain competitive, Universal Air's executive team conducted a customer survey and developed thirty new indicators to measure middle-management performance. This system was not successful, so new cross-functional teams, consisting of executives and middle managers, were formed to develop new performance measures. To ensure that the cross-functional teams are effective, all necessary resources should be provided. The most important such resource would be: comfortable meeting rooms. daily progress reports. cNone of the choices listed are necess strong top management commitment to the proces

strong top management commitment to the proces Strong top management commitment to the process that is clearly communicated is extremely important to the success of this participative management effort. Comfortable meeting rooms and frequent progress reports are also important but are not as critical as actual and indicated top management support.

Which of the following is not a characteristic of life cycle costing? It measures the purchaser’s cost at the point of initial purchase. It focuses on better product design to reduce___ It examines the relationship between what the customer __ and the cost the consumer ___over the life of the product. It is used to improve market segmentation.

It measures the purchaser’s cost at the point of initial purchase. post-purchase customer costs. Pays, Incurs

____costing generally refers to the summation of a purchaser's costs from the point of initial purchase to the point of ultimate disposition of the product by the purchaser several years in the future. This concept deals explicitly with the relationship between what the customer pays for a product and the total cost the customer incurs over the product's entire life. This type of information can be very valuable in the following areas: Better product design to reduce post-purchase costs to the customer Improved market segmentation and product positioning

Life cycle

Managers of the Doggie Food Co. want to add a bonus component to their compensation plan. They are trying to decide between return on investment (ROI) and residual income (RI) as the performance measure they will use. If Doggie adopts the RI performance measure, the relevant required rate of return would be 18%. One segment of Doggie is the Good Treats division, where the manager has invested in new equipment. The operating results from this equipment are as follows: Revenues $80,000 Cost of goods sold 45,000 General and administrative expenses 15,000 Assuming that there are no income taxes, what would be the ROI and RI, respectively, for this equipment, which has an average value of $100,000?

20%, $2,000 Revenues of $80,000 less total expenses of $60,000 leaves net income of $20,000. Dividing $20,000 net income by invested capital of $100,000 gives a 20% ROI. The desired return at 18% on invested capital of $100,000 is $18,000. Subtracting this from the $20,000 net income leaves residual income of $2,000.

Based on the following data, what is the net income for the company? Sales $1,000,000 Net purchases of raw materials 600,000 Cost of goods manufactured 800,000 Marketing and administrative expenses 250,000 Indirect manufacturing costs 500,000 Beginning Inventory Ending Inventory Work-in-process $500,000 $400,000 Finished goods 100,000 400,000

$250k Cost of goods sold (COGS) equals COGM less any increase in finished goods (i.e., everything that was manufactured less what is still here in finished goods gives us what was sold), or $800,000 – ($400,000 – $100,000) = $500,000. Net income = Sales of $1,000,000 − COGS of $500,000 − Marketing/administrative expenses of $250,000 = $250,000 (Note that indirect manufacturing costs would have been included in work-in-process within COGM.)

ontrollable revenue would be included in a performance report for: a profit center. a cost center. both a profit center and a cost center. neither a profit center nor a cost center.

PROFIT CENTER ONLY Note that controllable revenue does appear in this performance report. On the other hand, only controllable costs appear in the cost center performance report.

___: Segmented reporting is useful in the management and control of an enterprise. Three types of responsibility centers 1. ____centers: Subdivisions of a business that are assigned responsibility for the incurrence and proper utilization of costs 2. ____centers: Subdivisions responsible for both costs and revenues 3. ___centers: Subdivisions responsible for costs, revenues, and profitable utilization of invested capital

Responsibility accounting Cost Profit Investment

Which of the following labor costs for a manufacturing company is deducted from revenues in order to determine gross margin but is not deducted from revenues to determine contribution margin? Manufacturing floor manager's salary Hourly assembly worker's wages Office manager's salary Salesperson's commissions

Manager's salary he only item listed which is classified as fixed manufacturing overhead is the manufacturing floor manager’s salary Hourly assembly worker’s wages are direct labor. The office manager’s salary and salesperson’s commissions are general, administrative, and selling expenses (nonmanufacturing costs).

___costing is a method of costing in which fixed costs are treated as a product cost and assigned to the units produced Absorption costing is required by both generally accepted accounting principles and the Internal Revenue Service (IRS). T/F Fixed overhead must be accounted for differently when computing product costs, cost of goods sold, or net income under the two methods. Fixed overhead is a product cost for absorption costing and a __cost for variable costing. ___

Absorption Trueee PERIOD

Spar Co. calculated the following ratios for one of its profit centers: Gross margin percentage 30% Return on sales 25% Capital turnover 0.5 times What is Spar's return on investment for this profit center?

12.5% Return on investment = (Income / Sales) x (Sales / Capital) = Return on Sales x Capital Turnover = 25% x 0.5 = 12.5%

The strategic planning process should focus on the firm's internal and external environment. An evaluation process that can be used to accomplish this is: activity-based costing. capital budgeting. full costing. SWOT analysis.

SWOT

Controllable revenues would be included in the performance reports of which of the following types of responsibility centers? Cost centers Investment centers Both cost centers and investment centers Neither cost centers nor investment centers

Investment Centers A cost center is a subdivision (unit, section, department, or segment) of the business responsible for the incurrence and proper utilization (control) of costs. An investment center adds revenues and investments to subdivision reports. Revenue is not reported for cost center performance reports since they are not controllable by the center manager. Revenue is reported for investment centers since the manager controls costs, revenues, and investments.

Which of the following types of performance measures integrates financial performance, internal operations, learning and growth, and customer satisfaction? Total productivity Financial ratio analysis Balanced scorecard Benchmarking

Balanced scorecard

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers? ROI is a percentage, while RI is a dollar amount. ROI may lead to rejecting projects that yield positive cash flows. ROI does not necessarily reflect the company's cost of capital. ROI does not reflect all economic gains.

ROI may lead to rejecting projects that yield positive cash flows.

The management of a company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts? Budget Forecast Benchmark Utilize best practices

Benchmark Benchmarking is the study of leading companies in the industry or companies that excel in various tasks. A company's management can strive toward improved performance by comparing and contrasting their performance to the performance of a “benchmark” organization.

Cuff Caterers quotes a price of $60 per person for a dinner party. This price includes the 6% sales tax and the 15% service charge. Sales tax is computed on the food plus the service charge. The service charge is computed on the food only. At what amount does Cuff price the food?

the answer is 49.22. 60/1.06 = 56.60 (the pretax but post service charge amount) 56.60/1.15=49.22 which is the pre service charge and pre tax amount. If you do it the other way around, you get the same answer

A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. Division B's residual income would be which of the following amounts?

$240 Residual income is the net income above a minimum desired rate of return on invested capital. This can be expressed in the equation: Reported net income - (Desired rate of return × Invested capital) For Division A, the residual income is: $500 - (0.10 × $1,000) = $400 For Division B, the residual income is: $400 - (0.10 × $1,600) = $240 (Total residual income for the company: $400 + $240 = $640.)

The proper discount rate to use in calculating certainty equivalent net present value is the: risk-adjusted discount rate. cost of equity capital. cost of debt. risk-free rate.

Risk-free rate Normally, investment projects are perceived to be subject to some degree of risk with regards to amount and timing of future cash flows. This risk is incorporated into the analysis by using a discount rate higher than the risk-free rate. If there is no risk (i.e., the cash flows are certain), the appropriate discount rate is the risk-free rate.

RANDOM ___is oriented toward the future. It is the first part of the budget cycle to assign resources to operating units. ___is the performance evaluation that provides feedback of the results. ___tries to ensure that the objectives are met, and thus it is oriented toward both the present and the past. __and __are continuous and interdependent.

Planning Control, control Planning & control

___ and ___ goals-----The mission of an organization is its central purpose, the reason for its existence. It answers the questions “What business are we in?” and “What business do we want to be in?” objectives & plans : company-wide plans with a long planning horizon of Goals, objectives, plans, ____objectives and plans translate overall strategy into shorter-range specifics for each division or department. _____objectives and plans are detailed implementation of the company's strategy. They are annual plans with specific objectives for individual operating units ___plans are sometimes called disaster recovery plans

Mission and strategic goals: Strategic objectives and plans Tactical Operational Contingency

An effective control system is necessary for an organization to realize its strategic, tactical, and operational goals T/F

True

An effective control system has monitors activities and processes so that progress can be measured against established strategic goals and objectives (_____), provides for identification of deviations from desired performance so that implementation of timely corrective action can occur (____), has the flexibility to be updated to allow for changing conditions (____).

measurement of progress corrective action adaptation to change

____ measures surplus or excess value created by an enterprise's investments.

Economic value added (EVA)

Three of the basic measurements used by the theory of constraints (TOC) are: gross margin (or gross profit), return on assets, and total sales. fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross margin (or gross profit). number of constraints (or subordinates), number of non-constraints, and operating leverage. throughput (or throughput contribution), inventory (or investments), and operational expense.

throughput (or throughput contribution), inventory (or investments), and operational expense.

_____is based on the idea that an organization has a single goal that is achieved through a complex system of linked activities. The drum-buffer-rope system is a tool for managing product flow. 1. Drum: The constraint in the system _ 2. Buffer: __is built into the system to provide slack around the constraint. 3. Rope: a___system such as kanban to trigger product flow

The theory of constraints (TOC) sets the pace Protective inventory “pull”

Net Income ___________ Invested capital What is this

RoI or RoA

Which of the following steps in the strategic planning process should be completed first? Create a mission statement. Translate objectives into goals. Determine actions to achieve goals. Develop performance measures.

Create a mission statement. A strategic plan is a document that assists a business with implementing its long-term goals and mission statement. In order to have a strategic plan, a business must first have a mission statement

Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs? Recording the number of products returned over time Tracking warranty expenses over time Inspection of in-process goods Tracking the number of products reworked

Tracking the number of products reworked A decrease in the number of products reworked over time represents an improvement in product quality due to a reduction in defective products produced.

Cost of quality (COQ) is an area of cost analysis that measures and monitors quality costs in four areas: ___: Costs of preventing bad quality (such as worker training and quality circles) ___: Costs of monitoring the level of bad quality (such as product testing and scrap reporting systems) ___: Costs of fixing bad quality (such as rework labor) ____: Costs of bad quality that are not discovered before shipment (such as warranty claims or customer ill-will)

Prevention Appraisal Internal Failure External Failure

Key Co. changed from a traditional manufacturing operation with a job order costing system to a just-in-time operation with a back-flush costing system. What are the expected effects of these changes on Key's inspection costs and recording detail of costs tracked to jobs in process?

A decrease in both inspection costs and detail of costs tracked to jobs Key's inspection costs will decrease because in a just-in-time operation the number of vendors is reduced and remaining vendors are expected to deliver higher-quality materials on a timely basis.

___ involves all employees in the quality control effort. It is the unending quest for perfect quality ____s a manufacturing philosophy that promotes the simplest, most efficient means of production. _____ is the application of quality principles to all of the organization's endeavors to satisfy customers.

Total quality control (TQC) Just-in-time (JIT) Total quality management (TQM)

Nonfinancial performance measures are important to engineering and operations managers in assessing the quality levels of the products. Which of the following indicators can be used to measure product quality? I Returns and allowances II Number and types of customer complaints III Production cycle time

Both returns and allowances and the number and types of customer complaints are measures of product quality as perceived by the ultimate judge of quality, the customer.

Contrib Margin: 70k Manager Salary: 20k Facility Depreciation: 8k Corp Expense Allocation: 5k Profit Center income: 37k Which of the following amounts would most likely be subject to the control of the profit center's manager?

70k Expense items subject to the control of the profit center's manager are limited to those items that the manager can alter or otherwise influence. Each of the period expenses listed is controlled at a level above the profit center manager. Since this profit center's sales and variable cost of sales are subject to control by the profit center manager, the resulting contribution margin of $70,000 is also subject to the profit center manager's control.

____accounting breaks the company into responsibility centers according to the ability of individuals to control various activities. Accounting reports are then prepared for each responsibility center consistent with the assignment of responsibility. How many types of responsibility accounting?

Responsibility 3

3 Types of responsibility accounting ___centers: Subdivisions of a business that are assigned responsibility for the incurrence and proper utilization of costs ___centers: Subdivisions responsible for both costs and revenues ____centers: Subdivisions responsible for costs, revenues, and profitable utilization of invested capital

Cost Profit Investment

olk Corporation is a highly automated manufacturing firm. The vice president of finance has decided that traditional standards are inappropriate for performance measures in an automated environment. Labor is insignificant in terms of the total cost of production and tends to be fixed, material quality is considered more important than minimizing material cost, and customer satisfaction is the number one priority. As a result, delivery performance measures have been chosen to evaluate performance. The following information is considered typical of the time involved to complete orders. Wait time: From order being placed to start of production 10.0 days From start of production to completion 5.0 days Inspection time 1.5 days Process time 3.0 days Move time 2.5 days What is the delivery cycle time for this order?

22 days ``` 10 days - wait time - order placement 5 days - start to completion 1.5 days - Inspection 3 days - process time 2.5 days - move time ``` 22 days

Select Co. had the following current-year financial statement relationships: Asset turnover 5 Profit margin on sales 0.02 What was Select's current-year percentage return on assets?

10% Consider the following relationships: Profit margin on Sales = Income ÷ Sales or Income = Profit margin on sales × Sales Asset turnover = Sales ÷ Assets or Assets = Sales ÷ Asset turnover Return on assets = Income ÷ Assets Since Sales cancels out: Return on assets = Profit margin on sales × Asset turnover = .02 × 5 = .10 or 10%

_________ _____Year 2 __Year 3 Operating Revenue 900k___1,1M Operating Expense 650k___700k Operating Assets __1.2M___2M What percentage represents the return on investment for Year 3?

25% Return on investment (ROI) is calculated by dividing the average invested capital into the net income: Average invested capital is (Operating assets from Year 2 + Operating assets from Year 3) ÷ 2. Average invested capital = ($1,200,000 + $2,000,000) ÷ 2 = $3,200,000 ÷ 2 = $1,600,000 Net income is Operating revenue - Operating expenses: Net income = $1,100,000 - $700,000 = $400,000 ROI = Net income ÷ Average invested capital: ROI = $400,000 ÷ $1,600,000 = 0.25, or 25%

Which of the following is one of the four perspectives of a balanced scorecard? Just-in-time Innovation Activity-based costing Benchmarking

Innovation A balanced scorecard considers several areas in comparing performance results of different business units, including customer satisfaction, learning and growth (innovation), internal business process improvements, and financial measures related to operations of the unit.

A ____considers several areas in comparing performance results of different business units, including customer satisfaction, learning and growth (innovation), internal business process improvements, and financial measures related to operations of the unit. It is viewed from 4 perspectives: 1. ____: This perspective forms the foundation of all knowledge-worker organizations and includes employee training and corporate cultural attitudes related to individual and corporate self-improvement. 2. ____processes: Metrics based on this perspective provide managers with feedback regarding how well their business is operating, 3. ___ perspective: If customers are not satisfied, they will eventually find another supplier(s) that will meet their needs. 4. ___: Even under a scorecard system, there remains a need for traditional financial data, provided that any undue emphasis on financial-related data does not “unbalance” the other perspectives.

balanced scorecard Learning and growth Business (internal) Customer (satisfaction) Financial

Incentive compensation programs should: promote and maintain an inspired and productive work environment. only promote productive work environments. only maintain an inspired and productive work environment. only promote an inspired work environment.

promote and maintain an inspired and productive work environment Incentive compensation programs should be set up to promote and maintain an inspired and productive work environment. Some people are not comfortable with change, but in a world of quickly changing technology, they must be inspired to move on with that technology. Incentive programs help with this issue..

Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price per unit to obtain a 15% profit margin on sales using the traditional markup calculation? $2,329 $2,277 $1,980 $1,935

2,329 Traceable costs per unit = $990,000 ÷ 500 = $1,980 This $1,980 represents 85% (i.e., 100% − 15%) of the target price. Target price per unit = $1,980 ÷ 0.85 = $2,329.41

Incentive compensation should promote and maintain a productive work environment as well as reflect organizational goals and missions. Which of the following is not a well-thought-out incentive compensation? Incentive compensation should rely solely on productivity. Incentive compensation should reward employees for a job well done. Incentive programs are focused on organizational goals, so the employees are rewarded for meeting the goals of the organization. Employees should be incentivized to embrace change and suggestions for change.

Incentive compensation should rely solely on productivity. If employees are only rewarded for productivity, they may ignore organizational goals and objectives, both internally and externally.

Continuous improvement, also called target-based costing, looks to reduce costs while maintaining quality. Which of the following is not a characteristic of continuous improvement? Engineering-driven standards are used rather than market-driven standards. The engineering-driven standard is based on current technology. Market-driven standards work in reverse order. Continuous improvement is sought until the target standard is achieved.

Engineering-driven standards are used rather than market-driven standards Continuous improvement seeks to reduce costs that frequently disturb the established order. One way to achieve this is by using market-driven standards rather than engineering-driven standards, which are based on current technology.

Which of the following management practices involves concentrating on areas that deserve attention and placing less attention on areas operating as expected? Management by objectives Responsibility accounting Benchmarking Management by exception

Management by exception

____generally refers to the summation of a purchaser's costs from the point of initial purchase to the point of ultimate ____ involves having manager and subordinate jointly develop objectives and plans.disposition

Life cycle costing Management-by-objectives (MBO)

Using a real options approach in capital investments planning helps managers in dealing with which of the following? Prolonged strikes Competitors Uncertainty Tax issues

The major benefit of using a real options approach is its effectiveness in dealing with uncertainty.

Division A is considering a project that will earn a rate of return that is greater than the imputed interest charge for invested capital, but less than the division’s historical return on invested capital. Division B is considering a project that will earn a rate of return that is greater than the division’s historical return on invested capital, but less than the imputed interest charge for invested capital. If the objective is to maximize residual income, should these divisions accept or reject their projects? Project A, reject; Project B, reject Project A, reject; Project B, accept Project A, accept; Project B, accept Project A, accept; Project B, reject

Project A, accept; Project B, reject Residual income is the amount of net income in excess of the imputed interest charge, so the division’s historical return is irrelevant if the goal is to maximize residual income.

``` Sales: 500k Variable Cost: 300k Traceable Fixed Cost: 50k Average Invested Capital: 100k Imputed Interest Rate: 6% ``` What is the residual income

144k ``` Sales: 500k LESS: 300k Variable Cost LESS: 50k Traceable Fixed Cost: LESS 6k Imputed Interest = Residual Income of $144k ```

When both the short- and long-term implications of a decision are examined, the total performance potential of a division or management level is better understood that creates a ___

comprehensive Picture

``` Sales: 311k Variable Cost: 250k Traceable Fixed Cost: 50k Average Invested Capital: 40k Imputed Interest Rate: 10% ``` What is the return on investment

27.5% Division net income equals $311,000 sales less variable costs of $250,000 and traceable fixed costs of $50,000, or $11,000. Return on investment is net income ($11,000) divided by investment ($40,000), or 27.5%.

Probability (risk) analysis is: used only for situations involving five or fewer possible outcomes. an extension of sensitivity analysis. incompatible with sensitivity analysis. used only for situations in which the summation of probability weights is greater than one.

extension of sensitivity analysis. Probability analysis can be used with an infinite number of outcomes, and 1.00 is the largest possible probability. It is helpful to combine probability analysis with sensitivity analysis to evaluate the sensitivity of various outcomes to risk.

____determines how the results will change if the original data or the underlying assumptions change. ___analysis combines the likelihood of various outcomes with sensitivity analysis. Probability analysis can be used with an infinite number of outcomes, and 1.00 is the largest possible probability. It is helpful to combine probability analysis with sensitivity analysis to evaluate the sensitivity of various outcomes to risk. T/F

Sensitivity analysis Probability True

5A - Total Flashcards

(97 cards)